Friday, September 6, 2013

SWOT analysis to save palm oil industry

华商与经济转型系列83：SWOT救活棕油业

夏伟文 & 陈薛卉

Palm oil has an interesting place in Malaysian
economy history. Originally grew wild in West Africa, it was introduced by
British to Malaysia in early as an ornament plant. Commercial planting started
by Frenchman Henri Fouconnier in 1917 in Tennamaran Estate, located at Batang
Berjuntai, Selangor. At that time, tin mining and rubber plantation are the
main engines of growth.

In 1953, Paley Report
claimed that Malaysia’s reserves of tin will be exhausted round year 1980s.
In 1960s, rubber plantation fading fast mainly because of losing competition to
synthetic rubber and rising cost of production. Fear of losing these two growth
engine, government introduced economic diversification program. Besides import-substitution
industrialization, commercial palm oil plantation has been promoted not only as
new engine of growth but best solution to eradicate poverty in rural.

Since then, Malaysia has been the No. 1 producer and
exporter of palm oil in the world. However, Malaysia is currently only second
largest producer behind Indonesia but still the largest palm oil exporter in
the world. Its contribution to national economy has dropped to 4th
largest, amounted for about 8% of national Gross National Income (GNI) per
capita.

Nonetheless, palm oil plantation remains important and
being selected as one of the twelve “National Key Economic Areas” (NKEA) in
Economic Transformation Program (ETP).

SWOT Analysis &
ETP Strategies

SWOT or “Strength, Weaknesses, Opportunity, Threat”
analysis can give systematic assessment on palm oil plantation in Malaysia as
well as suitability of ETP strategies on this area. In Sun Tzu’s Art of War, we
should tap benefit from favorable opportunity and avoid threat to enhance our
strength and minimize our weakness.

Strength

ETP has identified three strengths for Malaysian’s
palm oil. Firstly, Malaysia has amongst the highest average palm oil yields per
hectare per year at 21 tonnes. Our closest competitor, Indonesia has 19 tonnes
per hectare. Entry Point Project (EPP 2) aims to further improve the average
yearly fresh fruit bunch yield to 26.2 tonnes per hectare by 2020.

However, Statistical Department and Malaysian Palm
Oil Board (MPOB) give different yields scenario as in Figure 1. Between 1974
and 2012, yields per hectare ranged from 15.90 tonnes (lowest, recorded in
1983) to 20.26 tonnes (highest, recorded in 1993). Average value for that period
is 18.47 tonnes per hectare. Thus, if based on this average figure, the yield
rate needs continuous annual growth of 4.467% starting from 2013 until 2020 to
achieve its target.

Figure 1: Malaysia’s Palm Oils Yields per Hectare

Source:
Statistical Department and Malaysian Palm Oil Board (MPOB)

Smallholders’ planter who collectively accounted to
63% of “backlog” palm oil trees (aged above 25 years) are main target group for
improvement. Palm oil tree of that age is believed to give very low yield per
hectare. Among the program planned to enhance yield are increasing expertise
officers (called TUNAS) to give service to smallholders clustering all
independent smallholders, mandating one of industry best practices for all and
annual ranking of average yield for smallholders. Of course, a longer term
solution will be replanting the palm oil trees that are older than 25 years as
targeted in EPP 1.

Second strength is excellent plant breeding
activities. ETP claimed that Malaysia has 20 world class seeds producers. They
have annual production capability of 87 million seeds and leading in related
Research and Development (R&D) activities. These most likely useful in
producing higher yield seeds/plants, increasing palm oil extraction rate (EPP4)
and developing downstream palm oil industry.

Thirdly, regulatory environment in Malaysia is
believed to be conductive. The Malaysian Palm Oil Board Act 1998 replaced two
old Acts on palm oil industry while dissolved three related regulatory bodies
to consolidate into Malaysian Palm Oil Board (MPOB). The Acts is comprehensive
in vesting power to enable conductive function of MPOB.

Weaknesses

The biggest weaknesses are perhaps (i) limited land
bank and scope of mechanism, and (ii) reliance on upstream. ETP estimated that
the country may able to increase land bank for palm oil up to 28 percent only
or 1.3 million of additional hectare. These additional lands most likely will
be on hilly or peat terrains while 75% (or 1 million of hectare) will be
located in Sarawak. Making things worse, palm oil plantation heavily relied on
foreign workers who are cheaper than but unfortunately not as cheap as in
Indonesia, the current world largest palm oil producer. Mechanism may increase
overall productivity, thus make up for the disadvantage in relative higher cost
of production.

To increase workers’ productivity, EPP 3 proposed
for changing from (i) manual harvesting to motorized harvesting known as
“Cantas”, (ii) everyday traditional sharpening to “diamond” sharpening that can
lasted about 5 days, and (iii) manual collection to buffalo assisted
collection, which is 12 times less costly per unit than mini tractor grabber .

On the second weaknesses, our oil palm industry
heavily depends on upstream segment, which involve mostly harvesting the palm
fruits, production of crude palm oil and simple processed form like crude palm
olein and palm fatty acid distilled. Upstream outputs usually have relatively
lower value added as compare to downstream segment such as biodiesel and
oleochemicals. Upstream segment contributed 87% of industry GNI and 81.5% of
total export of variety types of palm oil output.

Thus, EPP 6 focused on development of oleo derivatives,
which is a further process from basic oleochemical. The later is currently
oversupplied in global market (expected to remain oversupply in near future)
and has average lower profit margin at 7%. The higher-value oleo derivatives
has higher average profit margin at 20%. Other strategies listed included
commercializing second generation biofuels (EPP 7) and growing food-based and
health-based downstream segment (EPP 8).

Opportunity

Raising global population and income may have caused
global demand for oil and fats (includes palm oil) rising at an average rate of
about 7% over the past ten years. Indeed, demand for palm oil growing
relatively faster at about 10%. According to Bloomberg report on 7th
May 2013, palm oil export globally is predicted to increase to a record high of
up to two thirds of combined exports of seven major oils and fats. This is due
to insufficient supplies of other oils and fats, price discount of palm oil as
well as strong demand from China and India. Thus, this situation provides good
opportunity for palm oil industry. Table 2 shows selected data of palm oil
production, import, export and consumption extracted from United States
Department of Agriculture (USDA).

Another opportunity for oil palm as compared to
other types of oils is that the former has much higher yield per hectare versus
its substitutes. Oil
palm produces 4 to 5 tonnes of oil per hectare which is 8 to 10 times higher
than other oil seeds such as rapeseed and soya bean.

Threat

Threats to palm oil industry have always been
international anti-palm oil campaign and palm oil tree’s pest and diseases.
Palm oils are constantly being attacked (believed to be orchestrated by
American soya bean lobby group) on health and carbon footprint issues. Unjust
tariff and smear campaign do harm palm oil competitiveness in global oils and
fats markets, especially at non-Asian countries.

In pests and diseases aspects, ETP itself has
acknowledged that long-term sustainable, cost-efficient and effective solution
is still not available. The only temporary solutions currently are continuing
research, early detection and constant control.

In the aspect of threat, no clear plan is found in
ETP to reduce the mentioned threats. The only partially related measure is
commercialization second generation bio-fuels (EPP 7) which is seem as
environmental friendly and could reduce carbon footprint.

In conclusion, history has proved that palm oil can
be an important source of growth for Malaysia. However, industrialization has
eroded its contribution but increasing uptrend of palm oil price and global
demand may help reviving palm oil industry in Malaysia. Yet, right strategies
are critically needed to maximize the strength, minimize the weaknesses, take
advantage of the opportunity and reduce the threat.

[Chinese version published at Nanyang Press, 28th January 2013. Available online at http://www.nanyang.com/node/550860. This English version may be slightly different from the Chinese/ newspaper version]